Two Lehman Brothers entities and the General Electric Pension Trust recently won a decisive court case in France – a ruling with significant implications for special purpose vehicles (SPVs) that own French assets and find themselves in trouble with their lenders.
A few weeks ago, the UK branch of Lehman, a US entity of the same firm and GE’s pension fund saw their right to a French Safeguard Procedure (sauvegarde) – similar to Chapter 11-style protection in the US – upheld in the Versailles Court of Appeals after a four-year legal tussle with bondholders. The lawyer for ‘Heart of Défense’ (also known as ‘Hold’ and ‘Dame Luxembourg’, the names of the investment vehicles used by the Lehman entities and GE) said the case surrounding the 3.8 million-square-foot Coeur Défense office complex has “far reaching implications.”
Jean-Philippe Robé, of Gibson Dunn & Crutcher in Paris, explained that the Coeur Défense case actually had several important legal outcomes, but one of the most important was the clarity that an offshore SPV could avail itself of France’s sauvegarde even though the SPV may employ no one and had no real activity besides owning a French property. He added that the decision came at a particularly sensitive time because the upcoming refinancing needs of borrowers are expected to lead to substantial debt restructuring in the coming months and years.
The back story to Lehman’s involvement in Coeur Défense is complicated, and not all the facts have been made public. In July 2007, Hold was established by a group of investors, including Lehman Brothers, to buy the Coeur Defense complex for €2.1 billion, partly financed by a €1.6 billion term loan due for repayment in July 2012. As part of the financing, the loan was transferred to a securitisation vehicle, Windermere XII FCT, with Lehman Brothers International providing the interest rate hedging for the securitised loan.
The Coeur Défense acquisition was a huge deal in a number of respects. The sellers were France’s Unibail and Goldman Sachs’ Whitehall funds, two titans of the real estate industry. In addition, the property itself, completed in 2001, consists of two 160-metre buildings and three low-rise buildings, making it the biggest scheme of its kind in Europe.
The problem arose in September 2008 – more than a year after the deal – when Lehman collapsed, causing Lehman Brothers International to lose its credit rating. That event triggered a default because the loan conditions required the hedging counterparty to maintain a minimum rating for the length of the loan.
Hold and Dame couldn’t find anyone to take over as hedge providers because the financial system was collapsing. Bondholders met to discuss their options, including enforcing the loan, which could have required the forced sale of Coeur Défense at a time when property values were plummeting. Making things more complicated, it has been suggested that, at the same time as Lehman was collapsing, a deal already was afoot by Lehman to transfer its interests in the asset to private equity real estate funds of Lehman Brothers Real Estate Partners.
To prevent bondholders from enforcing the loan, Hold and Dame took to the courts in order to seek protection. At first, their case went well, as the Paris Tribunal of Commerce allowed them the support of the sauvegarde procedure. However, in February 2010, the decision was quashed by the Paris Court of Appeals. The judgment hinged upon a view that the two legal entities owning the asset did not face difficulties of an ‘operational nature’ as required under the French sauvegarde law.
That was a bombshell decision for all private equity real estate firms that have acquired assets in France and now faced problems, as here was a court saying there could be no Chapter 11-style protection to allow problems to be resolved over time. Suddenly, everyone was taking notice of the Coeur Défense case.
Better news arrived in March 2011 when the Cour de cassation overturned the Paris Court of Appeals. Then, a few weeks ago, the Versailles Court of Appeals – after nearly a year of consideration – ruled decisively that the sauvegarde procedure should apply.
The Versailles Court of Appeals came to some interesting conclusions. It found that Dame was a holding company with no employees or turnover in Luxembourg, so its main centre of business was Paris. As such, Dame had the right to ask for protection. Furthermore, Hold did have a “serious and tangible threat” on its hands creating difficulties it could not overcome alone, as required by French law, because it could not find a hedging replacement within a tight timeframe.
Experts noted that French law has always had the reputation of being friendly to real estate borrowers. To that extent, the Coeur Défense case has changed little. However, the case has brought certainty that the sauvegarde can be invoked by offshore SPVs. This, in turn, will have been noted by lenders, who likely will factor in this risk into the pricing of future loans they underwrite.
It is thought that, with its legal troubles behind it, Coeur Défense might now be offered for sale in 2014.